This chart from the 2007 Architectural Study by Woburn-based DiCicco, Gulman & Co. shows last year’s per-hour billing rate for architectural firms.
Despite a downturn in single-family home starts, 2006 was a success for architectural firms, according to a new study.
While the U.S. Census Bureau reported that permits for residential projects fell to 1.8 million last year, down from 2.1 million in 2005, nonresidential construction increased by 6 percent in 2006. As a result, the majority of architects grew their businesses and increase profitability, the survey said.
The 2007 Architectural Study by Woburn-based DiCicco, Gulman & Co. found that the average firm saw a 7 percent increase in fees last year compared to a year ago. The study also shows that the average profit increased to $11.95 per hour in 2006, up from $6.52 hourly in 2005. The 83 percent hike represents the highest level in five years, the study said.
Still, not all of the news was positive for the profession. Demand for new homes slipped in 2006 and the related construction activity declined by 13 percent, according to American Institute of Architects. Additionally, although the K-12 education sector has experienced growth in several regions of the country, locally it has continued to stall due to stagnant state funding, the survey said.
The rapid expansion of developing economies around the world provided another avenue for growth and profitability in 2006. The global economy, led by China and India, expanded by 5.4 percent in 2006 compared to the U.S. economy’s growth rate of 3.3 percent, according to the International Monetary Fund. That blistering pace has created a tremendous need for improvements to the infrastructure of developing nations, including factories and office buildings, hotels and resorts, educational institutions and roads and landscapes, the study noted.
While there are obvious challenges to working on overseas projects, many firms took advantage of the opportunity to diversify their market segments and increase revenues, the study said.
The increasingly tight labor market continued to be a challenge for most architectural firms in 2006. As the average firm saw work increase, that situation put considerable strain on staff resources. The results of the study show that overall firm work increased to 64.4 percent in 2006, up from an average of 63.7 percent in 2005, the highest level in the study’s five-year-trend analysis.
The study also shows that average net-fee income per employee increased to a five-year high of approximately $126,000. It is important to note that an increasing number of firms turned to outsourcing as a way to create additional capacity.
A combination of higher demand for architectural services and the tighter labor market continued to put upward pressure on wage rates last year. The overall hourly wage rate increased to $33.46 in 2006 from $31.90 in 2005, another five-year high. The good news is that most firms were able to continue to pass on a majority of their increased labor costs to their clients, the study said.
As shown in the study, the average direct-labor billing multiple increased from 3.03 in 2005 to 3.11 in 2006 and the billing rate per direct hour jumped from $93.70 in 2005 to $98.45 last year.
Continued Weakness
Experts disagree over the outlook for the residential construction market, but most observers say there will be continued weakness in the residential sector. Global demand for design services is expected to continue to increase, as is the tightness in the labor market.
There has been no slowdown in merger-and-acquisition activity through the first half of the year, and the pace is expected to continue through the rest of 2007, the study said. The outlook for 2008 and beyond will depend significantly on the strength of the U.S. economy in the second half of 2007.
Most experts still believe the economy is fundamentally strong and expect the economy to grow in 2008, albeit at a slower pace. The AIA currently estimates that the nonresidential construction market will grow by 3 percent in 2008, with most of the growth occurring in the industrial, health care, religious and educational sectors.
In terms of challenges and opportunities for 2007 and beyond, the study said so-called best-practice firms can maintain their profitability and competitive edge because they plan for the future while they continually assess and improve upon their current strengths and weaknesses. Those firms remain diligent in those areas such as staff development and project management that represent ongoing challenges. Their proactive approach allows them to take advantage of business opportunities and capitalize on trends in the profession, the study said.
The study noted in its conclusion that the keys to success for architectural firms are to develop their staff, maintain or improve upon project profitability, continue marketing for new business, and diversify their practice into a few strategic market segments and/or geographic areas. Firms that are able to make progress in those areas will be well on their way to another profitable year, the study’s authors wrote.
The purpose of the survey is to provide the design community with information on industry trends. Information used in the study was based on data from 23 architectural design firms located primarily in Greater Boston. It provides historical statistics of operating performance of the participating firms over the past five years. The study is not based on a formal statistical survey, but rather is intended to provide useful information relating to the financial and operational performance of the sample of firms.
